New normal: miles driven recovers slowly, but opportunities for aftermarket growth exist

David Portalatin, executive director of industry analysis, NPD Group Inc., discusses the state of the automotive aftermarket with AAPEX attendees.

LAS VEGAS — The days are long gone when automotive service providers could expect annual profit increases as more and more consumers got behind the wheel.

Miles driven has not seen a drastic post-recession recovery, continuing to hover at about the same level it was in 2004 — and still far short of its peak in November 2007. Automotive service providers must learn to accept this “new normal,” according to David Portalatin, executive director of industry analysis for NPD Group Inc.

“The reality today is that we are driving 60 billion fewer miles per year than we were before the recession,” he said.

Speaking to a room full of attendees at the 2014 Automotive Aftermarket Parts Expo (AAPEX) trade show in Las Vegas, Mr. Portalatin said tire dealers and automotive service shop operators “cannot just simply expect that automatic 3- or 4-percent growth happens every year just because of the rising tide in the market place.”

However, he added, opportunities for growth do exist, specifically in premium and high mileage product offerings.

“We've got to work harder,” he said. “We've got to challenge ourselves more to get differentiated in what we offer.”

Average retail prices during the period “inched ahead a little bit further than what we thought they would,” Mr. Portalatin said. In addition, the summer driving season was slightly better than expected.

Unit sales volume, however, slipped by about 1.2 percent during the period.

The same key factors impacting the market in 2014 — miles driven, retail price and the consumer price index for new and used vehicles — will continue to be main drivers going forward, according to Mr. Portalatin.

“Next year's forecast is going to say miles driven, the forecast after that is going to say miles driven and the next 20 or so forecasts after that are gonna say miles driven, because the number of cars on the road and how people use those cars is primarily what generates demand for (the dealers') products and services,” he said.

The bad

Miles driven has significant hurdles to overcome and may not see a robust recovery in the foreseeable future, Mr. Portalatin said.

One of these hurdles is generational. According to NPD Group, only about 37 percent of 16-year-olds have a valid driver's license.

“This generation, the Millennial generation that's coming online, they're different in a lot of ways,” he said. “This peak on this miles driven chart in November 2007 was created by 80 million or so Baby Boomers living dual income life¬styles—two people getting in a car every day, separate cars, driving to work, driving back. Then you throw in all the vacations and the shopping trips and other ancillary stuff, and we created a car culture.”

Many of those Baby Boomers have retired or have begun to work less in recent years, and the country's collective mileage reflects that.

“What we'd like to see is the 75 or 80 million or so Millenials who would replace them adopt those same behaviors,” he said. However, that has not been the case.

“As they do move into career and family life, we would naturally expect their driving patterns to change, but the reality is they're on a different plane—they're on a different level,” he said. “They didn't start driving at the same age as Boomers did, they don't own cars at the same rate that Boomers do, they live more urban lifestyles and on, and on and on.

“So I do think even though we will see this group eventually take their place as the largest generation of licensed drivers that we've probably ever seen, I don't think that they necessarily use their vehicles at the same rate that their predecessors have.”

Recent workforce trends have been another setback to growth in miles driven.

According to the results of NPD's 2014 Consumer Outlook Survey, about 35 percent of consumers have made a significant work habit change—moving closer to work, working closer to home, working from home or working less—in 2014 compared with only 19 percent in 2008.

“That's a pretty significant shift of people who are commuting very, very differently,” Mr. Portalatin said, noting that the biggest change has been in those who are working less. In that category, the number of respondents has more than tripled in 2014 compared with 2008.

“Obviously unemployment is higher than it was before the recession, but it's more than just unemployment,” he said. “…There are simply fewer people working today than there was back then. Unless something fundamentally changes there, I think it's going to be hard to see a lot of growth in miles driven.

The good

Despite these challenges to automotive service, certain segments of the aftermarket have been especially strong.

NPD predicts growth to continue, but at a slower rate in 2015, with 52-week forecast of 1.4 percent growth. Mr. Portalatin said the market will be softer because of a projected flattening in selling prices.

However, a few “power segments” are expected to see growth of at least 10 percent in 2015, both in terms of dollars and unit volume. NPD Group tracks 29 automotive categories comprising 527 separate segments, of which Mr. Portalatin said 10 grew as much as the rest of the market combined in 2014:

High mileage oil;

Automotive batteries;

Capsules/bulbs;

A/C charging kits;

Premium filters;

High mileage filters;

Beam wiper blades;

Hybrid wiper blades;

Synthetic motor oil; and

Extended life antifreeze.

According to Mr. Portalatin, these segments tell the story of two “power trends” in the automotive aftermarket: the increasing average age of vehicles and the growing “consumer affinity for a premium differentiated product.”

“These 10 make a clear and compelling case that to win in 2015, you want to resonate with consumers around helping them with their aging vehicles and/or having a premium differentiated value proposition,” he said.

The used vehicle market especially is driving consumer sales in automotive and will continue to do so in 2015.

“The reality is about half of the people that want to replace their car, they're not even thinking new,” he said. “They're thinking used.”

And the used car that consumers are buying today is different than the used car consumers have bought in the past, he added.

According to NPD's Consumer Outlook Survey, people who bought a used car more than three years ago were buying, on average, a 3- or 4-year-old vehicle.

However, nearly a third of people who reported buying a used car in the past three years bought one that was at least 10 years old.

In all, 58 percent of survey respondents said they drive a car that is at least eight years old, a 20-percent increase over the last five years. Another 53 percent of respondents who own a vehicle that is 11 or more years old said they planned to keep that car for at least another four years.

As for the other 47 percent of those older car owners, most of them reported that they plan to replace their existing car with another used model.

“The American consumer has fundamentally revalued the way we think about the age of a car and what that car is worth,” Mr. Portalatin said. “…The conventional wisdom in this industry for a long, long time was that at 10 years or so people don't want to spend or invest in those cars anymore. That has changed.

“Our sweet spot is much, much older than it ever was in the past, and we need to get our heads around that and embrace it because it's a huge opportunity and it's going to be around for a long time.”

Older car owners also are more likely to spend money to keep their vehicles running, according to the survey results.

In general, Mr. Portalatin said, consumers are still in “cutback mode,” and NPD Group expects vehicle purchases to be lower in 2015 than in 2014. About 28 percent of respondents said they planned to spend less in the category, while only 9 percent said they planned to spend more.

But the sentiment for cutting back is not as strong on the automotive care end, where nearly an equal amount of respondents said they planned to spend less or more in 2015 on professional repairs and oil changes.

“Consumers are willing to spend a little bit more for the differentiated offering,” he said. “They may shop around and get the best deal they can get on it, but there are still opportunities for margin growth and traffic growth by focusing on some of these (premium products).”

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